Good Bye to the Glory Years of Real Estate Investing


Has the Foreclosure Era boom in small-time real estate investing peaked and begun its decline?

Will the seven million investors, both those who buy and sell properties for a living and those who are largely landlords, slowly sell off their assets as they cash their assets it to profit from rising home values?

Will the hedge funds gobble up what’s left and dominate markets where there are inventories of foreclosures for sale and favorable cap rates, leaving the fringe markets to the small guys?

The latest annual survey of investors by the National Association of Realtors, which is actually a survey of Realtors, found that investor purchases in 2012 fell slightly.  Investment-home sales edged down 2.1 percent to 1.21 million in 2012 from 1.23 million in 2011, according to NAR’s 2013 Investment and Vacation Home Buyers Survey. Investment-home sales accounted for 24 percent of all home sales in 2012, down from 27 percent in 2011, marking the second highest share since 2005, NAR said.

Surveys aren’t Hard Data

By itself, this survey is no reason to panic.  Investor sales soared in 2011, so a small decline doesn’t mean much.  The investor market share is still near historic highs.

“With rising prices and limited inventory, notably in the low price ranges, investors are likely to step back in coming years,” said NAR Chief Economist Lawrence Yun in a statement.

Moreover, the data isn’t so great.  Realtors are one step or more removed from investor purchases at auction and pre-foreclosure sales.  Most Realtors represent owner-occupants, not investors, and rely on MLS data on cash sales and distress sales when responding to such surveys.  However, there isn’t better data publicly available.  Estimates of investor purchases that you see in the news are either surveys or reports that equate cash sales with investor purchases.

Three Reasons to Worry

Here’re three reasons why anyone counting on the real estate investment boom continuing at its current rate should be worried:

  • Foreclosures are drying up and becoming significantly more expensive.  New foreclosures are down 20 percent and register higher periodically only as lenders clean up their shadow inventories now that they have new processing standards.  Foreclosure and REO inventories also are falling about 20 percent a year; faster in hot markets where cap rates are high and hedge funds are active.
  • The first signs of single family rental/multifamily rental oversupply are here.  (See Yellow Light on Single Family Rents).  Whether demand will stiffen as the single family option becomes more popular is anybody’s guess but there’s certainly reason for concern in the most overbuilt markets.  To some degree, demand for single family rentals is directly tied to barriers limiting homeownership, especially high lending standards and tight inventories of homes for sale.  In time, these will resolve themselves.  Lenders, who have been preoccupied with the refinancing boom turn to the purchase mortgage market and realize that a little relaxation of standards will be good for business and be smiled upon by people like Ben Bernanke and Fed Governor Elizabeth Duke.  As for inventory, home builders are cranking overtime to fill the need.  It might take a couple of years, but the crazy price bubbles in markets like Sacramento, San Jose and San Francisco will cool off.  The homeownership engine is working and renter biding time in single family renters won’t have to wait more than a year or two.
  • Hedge funds have the staying power that small investors lack.  They’ve already made their mark in places like Phoenix and Vegas where they drove up foreclosure and REO prices so high that they drove small investors out.  As foreclosure inventories dry up, this sort of cornering of the foreclosure supply will occur even faster wherever rental markets are strong, like Florida, Denver, and other resort destinations.  Fifty hedge funds may not survive, but those that do will consolidate their positions as both competitors and small investors sell to them.

Small investors certainly won’t go away entirely.  They are an important part of the residential real estate landscape.  They were around long before the Foreclosure Era and they’ll be around long after.  However, a special moment when entrepreneurialism, chutzpah, persistence and opportunity came together at the right time to save imploding real estate markets will pass away and with it the glory years of small investors who ruled the nation’s real estate economy.

Then again, I could be wrong.  What do you think?
Photo: James Whitesmith

About Author

Steve Cook is the editor of Real Estate Economy Watch and writes for a several leading outlets in addition to BiggerPockets, including Equifax and Total Mortgage. He also provides communications consulting services to leading real estate companies. Previously he was vice president of public affairs for the National Association of Realtors.


  1. I’m not buying it. Banks are holding off on foreclosures artificially to prop up earnings reports. JP Morgan has 25% of their mortgages underwater and showing record profits because of the mark to market issue. Obama gave them a pass on that one; for now. Hold on to your hats, foreclosures are still on their way.

  2. Michael Woodward on

    Thanks Steve. Your articles are always very informative. Thanks for keeping us up to date on the market at large. I’ve recently heard of several local small-time investors (1 to 4 houses/year) that are getting out of the business. I got the information 3rd-hand so I didn’t have the opportunity to ask them why they were getting out. Are you hearing the same on your end?

  3. Ali Boone

    Good points and I don’t think too far from accurate. Prices are definitely going up, returns are lower than they were even a year and two ago, and inventory at least in some markets is getting tougher. It’s all far from over, and plenty of deals to be had, but things are moving along, no doubt about it. It is a bummer for getting all those super killer steal of deals, but there will always be deals.

  4. Did someone say SHADOW INVENTORY? No one is talking about this. Did it go away? Did investors buy ALL the shadow inventory? HELL NO!!! Drive your neighborhood, look at the empty houses. What do you think is happening to the home. Lawn mowing that’s it. The banks Preserve and Pray strategy is going to come back to bite them in the _ False figure are helping the economy. Put the foreclosures on the market with the Short Sales and you have a MAJOR problem. Chase should be dissolved. same with all the big banks. Go back to local lending. This mess would not have happened. Small local banks do not have the risk-you would not have gotten the loan. SIMPLE

  5. You guys are concentrating on the inventory side, but you have to find renters for all those great deals you are getting. With bank loosening the underwriting for loans, now your renters are buying house and you are stuck with an empty house.

  6. We are REO agents for over 12 years. The shadow is just that a shadow. We are in the suburbs of Chicago. We have home just sitting for years. Chicago has buildings sitting vacant. The shadow has not been touched just preserved. The FED are buying ALL the RMBS. To the tune of 80 BILLION a MONTH. Yes a month. Where is all that money coming from? What are they doing with that inventory? Preserve and put it in the shadow.

  7. Robert Levaro on

    I can only speak for my market, Phoenix AZ. Here there is no shadow inventory. Non judicial foreclosure have cleared the inventory. Of course many people are still underwater on their mortgages, but if they were going to capitulate, they would have by now. Obviously circumstances can change for an individual that will throw them into distress but the strategic defaults are over. Our trustee sales (foreclosure auctions) volume is down 70% in the last 18 months. Everything (that doesn’t have a government guarantee) at the courthouse steps is being purchased by third parties after having been bid up to full retail price. Rents on SFRs are declining as so much inventory has rapidly been put into service by hedge fund buyers.

    In the face of all this many of my colleagues continue to talk about the “vast shadow inventory” and the “next shoe to drop”. These are otherwise intelligent adults that might as well be expounding their views on the Tooth Fairy and Santa Clause. Even if the facts were different and they were right, the enormous appetite of the hedge funds (for which a 6% return is acceptable) would likely lap up any incremental increase in inventory. Thank you for your rational description of the changing landscape. I am confident that many small investors will be able to adapt —but only if we can soberly access the environment we are dealing with.

  8. Hello Mr. Cook and All: My wife and I have purchased 8 SFR from $76,500 to $145,000.00. All the homes are located in what is considered great neighborhoods and sought after areas due to shopping and quick assess to interstates and public transportation. Our goal was to purchase these homes, get them paid off in, and live off the income for retirement. Right now, we have gross rents of almost $10K and mortage payments are at $4800.00. A 25% down payment was made on each home, it was completely renovated, with all new everything, including HVAC, hot water heaters, faucets, appliances, gutters, etc. No expense was spared in the renovation. All are renting for top dollar, in some instances, we are getting $200-$300. more per home, than a competitor in a similar home. If both rents were equal, we wold win the tenant as well, cause we have made our homes at least appear to be high end homes, and are exceptionally clean.

    All that to ask this. At present, we live off the extra income the properties generates. But, if you are correct, and rents go down, where would we be and what should we do to survive? Most of our homes are renting for double there mortgage. For example, a mortgage payment that is $700.00, rents for $1400.00. There are two homes that rent for more than double, and one home is paid for. So, rents would have to fall by double digits to get to where our payments are, $400-700.00. So far, the rent demand seems to be high in our area, just outside of Nashville, TN.

    The only options we have (that I as a lay person) would know to do, is to pay the homes off as quickly as possible, so that any declines could be absorb, and we could still have an income. Or, do we just hold steady to our plan, pay the mortgages off in due time, and continue to enjoy the income. By the time we retire, say 65, all the homes will be paid off. We don’t have any plans to buy any more homes, buy and flip, or otherwise to make additional money. We bought for the long term. Did we make a mistake?


    • My opinion is you made a great investment. I don’t rents dropping in my area any time soon. There is a lack of inventory for sales and rentals. They are starting to build again, but so far it is all upper to middle level homes. I think there will be continued demand for rentals, at least in my area.

      • Thanks Mark. I won’t to believe I have secured my financial future. The stock market sure didn’t do anything for me. I’m seeing the same thing here, new homes being built are $500k are higher and no new homes less than $200k. I realize that in 7-10 years from 2010, without legislative involvement, those unable to buy a home now, will be able to do so then. I’ve never been a landlord, so I’m hoping that SFR are here to stay. I wish they were here when I rented in the early 1980’s, that would have been my choice, rather than an apartment.

  9. convincing arguments, Steve, I love your dry & logical style – but I’d counter-argue that this is all a very cyclic construct. plus, it’s global – when things dry up for a few years in the US, they flourish elsewhere, and vice versa. I wouldn’t panic – but then again, I invest mainly in Asia, where we’re currently experiencing the same sort of boom the US previously did. Time will tell.

    • What great comments! Thanks, all.

      I think the variety of views and reports in part reflects the highly localized nature of foreclosure markets today.

      I’d also like to second Josh’s comment. Savvy investors always will find deals!


  10. karen rittenhouse

    Real estate investing is always great, strategies change depending upon the economic climate.

    And as far as those real estate agent statistics, that represents only a part of the market. Our group bought hundreds of properties last year and I bet less than 10% involved agents.

    Thanks for the post.

    • Karen, is the strategy of buy and hold, mainly for income and/or retirement income a strategy that is viable through the changing markets? To survive those markets, is it best to have paid you’re properties off or would it make any difference in the survival rate? I’m sure we are not the only individuals who purchased homes with the goal of long term ownership and for an income for many, many, years. Although, we have considered doing two to three flips per year, just to raise capital to assists in paying off the properties we own.

      • Hi Randy:
        Yes, buying subject-to is still a viable strategy. Our Attorney General does not like them which is the main reason we’re moving away from them. The banks seem to have zero problem with them.

        Of course, interest rates will go up. The government keeps freezing them at these unbelievable low ceilings but, eventually, they will rise. I can’t say how quickly they’ll rise, but I do warn to be cautious about the number of low interest rates you’re holding as the banks may begin calling those due when the properties have equity and rates have jumped enough that they can profit from taking them back and reselling them. We are focusing on other buying strategies now and on paying off the subject-to properties first for that reason. No crystal ball here, just awareness and, as always, paying attention to the national economy.

        Like you, we’re using money from flips to pay down mortgages. Determine how many you want to hold long term, then start paying them off. We pay off higher interest rates first.

        Thanks for your question!

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